In the Twilight Zone, It's Not the Economy, Stupid

Beyond the realm of inconvenient truths, there’s a dimension to which Bill Clinton occasionally retreats. It’s a dimension of fertile imaginations, sound bites and mind games whose boundaries the gullible determine. In this wondrous land, tokes aren’t inhaled, sex with interns isn’t sex, and the meaning of “is” isn’t always is. When Clinton wags his finger to punctuate a claim, like “no president – not me or any of my predecessors -- could have repaired all the damage in just four years,” it’s his poker “tell.” Next stop: the Twilight Zone.

Ironically, the president who rode to victory in 1992 on the theme “it’s the economy, stupid,” now suggests it’s stupid to examine the 39-month old economic recovery which, we were promised, would yield 4 percent gross-domestic-product growth and 5.6 percent unemployment -- not the current 1.6 percent and 7.8 percent, respectively. Before crossing over to the land of suspended disbelief, Think Again.

In fact, until now, all presidents over the last 75 years have performed better. As Milton Friedman observed, and a November 2011 Federal Reserve study verified, the worse the recession – even when caused by a financial crisis -- the stronger the recovery, absent bad government policies like those that prolonged and deepened the Great Depression.

Despite record levels of stimulation that exploded government spending to 25 percent of GDP (up from a 60-year 18 percent average) and four consecutive years of trillion-dollar deficits, an Associated Press study concluded “that by just about any measure”…this is “the feeblest economic recovery since the Great Depression. More than any other …people who have jobs are hurting: Their paychecks have fallen behind inflation.” Consequently, income inequality has materially worsened and, as Vice President Biden noted last week, “the middle class has been buried the last four years.”

The annals of post World War II economic recoveries show Biden is right. Never before have Americans suffered such poor prospects nor sought such refuge in safety net programs. When counting the millions of discouraged Americans no longer in the labor force, true unemployment is 14.7 percent. Meanwhile median household income has dropped nearly 5 percent, amidst exploding gas and food prices. Not surprisingly, a record number of Americans now claim federal disability checks and food stamps, up nearly 20 and 44 percent, respectively.

President Reagan inherited the other “worst” post WW II recession and, unlike the most recent, had to contend with double-digit inflation and interest rates, in addition to double-digit unemployment. By this point in his presidency, Reagan’s pro-growth policies had unleashed the economy, resulting in 7.1 percent unemployment, rising median incomes and 11 percent GDP growth.

Most importantly, Reagan’s work with Democratic house leader Tip O’Neill to implement historic tax, social security and immigration reforms -- and Clinton’s collaboration with Republican house leader Newt Gingrich to reduce government spending, lower taxes on investment, implement “consensus deregulation,” and reform welfare -- fueled the greatest economic boom in world history from 1982 to 2007. As business investment grew, so did the job market and the number of Americans paying taxes, confirming what President Kennedy said “is a paradoxical truth that…the soundest way to raise [tax] revenues in the long run is to cut [tax] rates now.”

If the current “recovery” had merely performed as well as the average of all post-World War II recoveries, current US GDP would be $1.2 trillion larger and 7.9 million more Americans would have jobs. Americans have been denied this prosperity because of unprecedented levels of government spending, job-killing regulation, and crony capitalism – partisan policies which large majorities of business leaders in two recent surveys (Business Roundtable and National Federation of Independent Business) say hurt them.

That 55 percent of small business owners surveyed wouldn’t start their business today reflects a lack of confidence in the economy’s future, imperiled as it is by $16 trillion in debt (up 50 percent since January 2009), a sum larger than the US economy. When interest rates increase from historic lows, larger interest payments will necessitate draconian budget cuts and increased taxes. Absent rapid GDP growth to bring debt-to-GDP levels down to manageable norms, Americans can’t be confident in a future that holds only two unacceptable alternatives – substantial tax increases or sustained inflation.

As the president who declared the era of big government over, Clinton understands our perilous fiscal state. Were he to emerge from the Twilight Zone, he’d agree that government spending should be capped at 20 percent of GDP -- the average during his presidency and a Romney campaign promise. He’d be opposed to increasing taxes in a fragile economy, as President Obama proposes. Most importantly, he’d be appalled at the lack of leadership evident in Obama’s budget – no plan to address the looming fiscal crisis and trillion-dollar deficits into oblivion.

I believe the president's budget received not a single vote, not one, so this isn't a "republicans are blocking our great president's vision for a socialist utopia budget" thing. Present a decent budget that doesn't add a zillion dollars to the deficit and maybe you'll get a vote or two.

Perhaps the financial crisis could have been salvaged by now, however there was a concerted effort by the Republican party to derail President Obama. As far as I know there are still 3 branches of government: the president proposes the budget and the Congress approves it. It seems a bit self serving based on the statement above to place 100% of the blame on the current economy on the Presidential branch when by definition Congress had a hand in it. Until BOTH parties decide to play nice in the Washington sandbox we are basically screwed.

Melanie, I enjoy your columns as a breath of fresh air in our local newspapers and in fact almost all available newspapers. As a graduate of the Wharton School (class of 59) and a student of the economy ever since, I'm amazed at the clarity and understanding that you show in your columns. Thanks for your contribution to capitalism.

I ran a business during the Carter debacle. I remember having to meet with bank each week and be told my rate was 1-2% higher. In the end the usury level of 25% broke the company.

Yes, it was a far worse economy that Reagan inherited.

But the day Reagan was elected hope was restored. The clouds parted and we as business owners knew we had a friend not a foe, an advocate not and adversary, a champion not a critic in the White House.
Psychology being the biggest driver in any economy, the change was immediate.

And just like JFK said we all made money in the '80s because "A rising tide lifts all boats."

Obama and Slick Willy are two of the best liars in recent memory. Reid and Pelosi are not in the same league.
Obama simply demands that you believe his strange narrative. Bill would schmooze you into believing.
Still there is that perjury conviction and now for Obama the 4 weeks of deadly stone cold lies about Benghazi.